MACD Divergence Explained
Understanding and interpreting a MACD divergence can be very helpful in your trading. You may ask what does a MACD Divergence means. Just that the current price trend is running out of steam and soon may reverse direction. Price reversal may not happen right away. But a MACD Divergence is a powerful hint that the market is changing direction. It is easy to spot MACD crossovers and dramatic rises but not so a MACD divergence. Spotting a MACD divergence correctly will only come after practice.
Suppose the price is making a series of higher highs. MACD is making a series of lower lows. What you are looking for is when the price action and MACD do not agree. Something is wrong between the two.
Most probably the traders are getting nervous and slowly fading out of their trades. MACD divergence is seen as a sign that fewer and fewer traders are in the trend. No one is trading against the trend and yet fewer and fewer traders are in the trend.
When the only traders in the trend are nervous, they are likely to exit their trade at the first sign of trouble. So if MACD is diverging from the bullish trend as soon as the bears muster up enough guts to short, the bulls will exit and the bears will take over.
There are two powerful keys in locating times when MACD divergence is likely to represent a reversal in the price action. This is exactly why MACD divergence is so powerful. It takes time to setup. However, when it works, it often works well.
When the price is at the double tops or double bottoms, MACD divergence can be powerful. At this point you spot MACD divergence. You are making your trading plan based on the reversal or breakout of the support and resistance (S&R). This is known as Exhaustion Pullback.
You should trade based on rejection reversal. What does this means? This means that the price action is running out of steam. This indicates that there are not enough committed traders to break the support and resistance (S&R). The price will reverse direction.
MACD is also used as an overbought/ oversold indicator or oscillator. Suppose you see that it has reached its overbought/ oversold range. The price action is turning normal. This is a signal that you should avoid trading at this time.
Dont think that it is overbought and everyone is buying. Dont confuse the overbought/ oversold MACD zones as trade opportunities. However, when the price reaches its extreme, you will see price exhaust and the MACD line drop back into normal zone.
These two situations along with your other tools can provide excellent trading opportunities. It is also important to note that divergence can not only be found on the MACD line and the signal line, it can also be found on the histogram. - 23159
Suppose the price is making a series of higher highs. MACD is making a series of lower lows. What you are looking for is when the price action and MACD do not agree. Something is wrong between the two.
Most probably the traders are getting nervous and slowly fading out of their trades. MACD divergence is seen as a sign that fewer and fewer traders are in the trend. No one is trading against the trend and yet fewer and fewer traders are in the trend.
When the only traders in the trend are nervous, they are likely to exit their trade at the first sign of trouble. So if MACD is diverging from the bullish trend as soon as the bears muster up enough guts to short, the bulls will exit and the bears will take over.
There are two powerful keys in locating times when MACD divergence is likely to represent a reversal in the price action. This is exactly why MACD divergence is so powerful. It takes time to setup. However, when it works, it often works well.
When the price is at the double tops or double bottoms, MACD divergence can be powerful. At this point you spot MACD divergence. You are making your trading plan based on the reversal or breakout of the support and resistance (S&R). This is known as Exhaustion Pullback.
You should trade based on rejection reversal. What does this means? This means that the price action is running out of steam. This indicates that there are not enough committed traders to break the support and resistance (S&R). The price will reverse direction.
MACD is also used as an overbought/ oversold indicator or oscillator. Suppose you see that it has reached its overbought/ oversold range. The price action is turning normal. This is a signal that you should avoid trading at this time.
Dont think that it is overbought and everyone is buying. Dont confuse the overbought/ oversold MACD zones as trade opportunities. However, when the price reaches its extreme, you will see price exhaust and the MACD line drop back into normal zone.
These two situations along with your other tools can provide excellent trading opportunities. It is also important to note that divergence can not only be found on the MACD line and the signal line, it can also be found on the histogram. - 23159
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Discover A Revolutionary New Forex Robot. Develop your own Forex Trading System.
posted by X - Men @ 1:17 AM
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